Chapter 49 CHAPTER VI INTEREST ON CAPITAL

Section 1 The theory of interest has lately been improved in many details, but without any major changes.Medieval Misunderstandings of Interest, Misanalyses of Rodbertus and Marx. The relation of supply and demand cannot be studied in itself, whether in the context of labor or capital.Because all factors that determine the problem of distribution and exchange center are mutually restrictive.The first two chapters of this part, especially those that deal directly with capital, serve as an introduction to this and the next two chapters.But before analyzing it in detail, it is necessary to outline the relationship between the modern research on capital and interest and the previous research.

Economic science has done a great deal to help us understand the role of capital in the modern industrial system, but it has not made surprising discoveries.The various important principles that economists now know, although those able entrepreneurs cannot give clear and precise descriptions, they have already become a reference for their actions. It is well known that the use of capital, if it cannot be profited from, will not be willing to pay a considerable price; it is also known that these benefits are of various kinds, and some people borrow money to meet urgent needs (real or forecast) , and to make oneself sacrifice the future for the benefit of the present, and to pay others to make them sacrifice the present for the benefit of the future.Some people borrow money to buy machinery and other "intermediate" goods, and use these to produce goods, which are sold at favorable prices.Some people borrow money to acquire hotels, theaters, and other service enterprises, which are the source of profits for managers.Others borrow houses for their own living, or borrow funds to buy or build houses;

And the resources employed in building houses, as in machinery, shipyards, etc., ceteris paribus, increase with an increase in the resources of the country and a corresponding decrease in the rate of interest.The need for solid stone houses rather than those of timber (which afforded equal convenience for a short time) marked the increasing wealth of the country, and the capital could be employed at lower rates of interest; It is equally affected by the demand for new factories or railways. It is well known that men generally do not lend to others for nothing; for even if their capital, or its equivalent, has no proper use for them, they can always find others who will profitably employ it, and will therefore be willing to do so. Capital is paid for; they look forward to the most favorable market.

It is well known that, even among the Anglo-Saxons and other nations of strong and cultivated character, there are very few persons willing to save the greater part of their earnings; The increase of inventions of late, and the opening of new nations, have opened wide avenues for the employment of capital; and it is generally understood, therefore, that the quantity supplied for the accumulation of wealth is far from the quantity demanded for the employment of capital, which, in contrast, is the source of wealth. The source, therefore, when the capital is lent, can get a return.We all know that the reason why the accumulation of wealth is limited, and the reason why the interest rate is not falling, is that the vast majority of people prefer present gratification to deferred gratification, in other words, because they are unwilling to "wait".Indeed, the first task of economic analysis in this respect is not to emphasize this well-known truth, but to point out how many more exceptions to this general preference there are than at first sight.These truths are well known; they are the basis of the theory of capital and interest.However, truth often appears in an incomplete form in everyday life.Specific relations are often obvious; but the interrelationship of the various causes of mutual self-determination is seldom seen in its entirety.The main task of economics, with regard to capital, is therefore to elucidate the order and interrelationships of the forces at work in production, accumulation of wealth, and distribution of income.Therefore, from the perspective of capital and other factors of production, there are mutual constraints among them.

Second, economics should analyze the influences that govern people's choice of present and deferred gratification, including, as their reward, ease and opportunity for various forms of activity.This honorable task, however, belongs to psychology; and economics borrows psychological theories, combined with other material, to solve its own particular problems. The analysis, therefore, is very onerous, and this and the next two chapters shall be concerned with the analysis of the advantages of accumulating wealth in the attainment of desired ends, especially when that wealth takes the form of estates. in the form of capital; for these interests or profits include many elements; some of which are interest in the employment of capital (in its broadest sense), and some are pure or so-called real interest; These include the reward for risk; there are also those that belong to the combination of elements more than those that belong to any one element.

In the past three centuries, the scientific capital theory has a long history of continuous growth and development in these three aspects.Almost all the main aspects of capital theory, as we know now, Adam Smith seems not to see very clearly, but Ricardo observed very thoroughly.Although economists like to emphasize different aspects, some emphasizing one aspect and others emphasizing the other, there seems to be no good reason to believe that since Adam Smith, the great economists who have passed through, No one has ever completely neglected any aspect, and it is certain that Ricardo, the practical financial genius, did not neglect what the entrepreneur was familiar with.Nevertheless, the theory has been advancing; almost everyone has either improved in some way, giving the theory a more complete and clear outline, or helping to explain the complex relations among its parts.The points discovered by great thinkers were not completely unknown before; however, new things are always added.

Before the second quarter. But if we read ancient and medieval history, we must know that there is no definite conception of the nature of the service rendered by capital to production and of the interest which pays for it.Because past history has an indirect influence on the problems of our time, it must be described here. In primitive society, there are very few opportunities to use new capital in enterprises, and generally, if a person with property does not directly use this property himself, it is very good for him to lend it to others without charging any interest if he has a solid guarantee. There are few sacrifices.Borrowers are generally poor and helpless people who need money urgently and whose bargaining power is weak.As for the lenders, they are generally either those who use the surplus to help poor neighbors, or usurers.Whenever the poor need money, they come to the door of the usurer to borrow money; the usurer often uses his power cruelly, and the poor are caught in a trap, enduring great pain, and it is difficult to get out.Sometimes he or his children became slaves.Not only uneducated people, but also ancient sages, priests of the medieval church, and British officials in contemporary India often said: "The money lender uses the misfortune of others for his own business. The oppressors set a trap."In such a society, the question worth discussing is whether it is in the interest of the general public to encourage people to borrow money according to IOUs and repay both principal and interest at that time?Do such excuses, taken together, increase, rather than diminish, the total happiness of man in general?

Unfortunately, attempts have been made to resolve this great practical difficulty by making a philosophical distinction between interest on loans and rents on material wealth.Aristotle once said: Money is not produced, lending money and collecting interest is equal to the unnatural use of money.And the scholastics who followed him plausibly said that a person who lends a house or a horse can charge a fee because he sacrifices the enjoyment of the thing, which can directly bring benefits.But they hold that interest on money cannot be compared with this, and say that it is wrong to charge interest on money, because it is a charge for a service which charges nothing to the lender.

If it really costs him nothing to lend, if he himself does not use the money, if he is rich and the borrower is poor, it may undoubtedly be held that he ought to lend without payment.But on the same grounds, he should also lend without payment to his poor neighbors a house which he does not live in, or a horse which he does not use.What this school of thought really means, and in fact gives a very pernicious illusion (not to mention the special situation of borrowers and lenders) is that the lending of money (i.e. the disposition over commodities in general) As in the lending of a particular commodity, there is no sacrifice on the part of the lender, but an advantage on the part of the borrower.They deceived the fact that the borrower could buy a strong horse (for example) with the borrowed money, the services of which he could use, and when the payment was due, he could sell the horse for the original price.The lender sacrifices such a right, and the borrower acquires it.Therefore, there is essentially no difference between borrowing money to buy horses and lending horses directly to people.

The third section continues. History itself repeats itself in part.In the modern Western world there is a new impetus for improvement which has drawn its strength from and further contributed to the error of another erroneous analysis of the nature of interest.With the progress of civilization, loans to consumers are constantly decreasing, and occupy a secondary place in all loans; while capital loans for the employment of enterprises are more and more increasing.As a result, although the borrower is now not regarded as an object of oppression, there is such an evil that all producers, whether they employ loan capital or their own capital, count as interest on the capital they employ. part of the cost of production which must in the long run be replaced by the price of their commodities as a condition of continuing business.Because of this, and because the modern industrial system affords the opportunity to amass great wealth through the triumphs of speculation, it has been thought that the payment of modern interest persecutes the working class, though not directly, but Indirect persecution; the payment of interest deprives the working class of a considerable portion of the benefits of increased knowledge; and thus draws a practical conclusion that no private possession of any means of production, or public utility, other than the means of subsistence, is permitted for the common good and justice.

This practical conclusion has been supported by arguments which we should note; but for the moment we are concerned only with the doctrine which William Thomson, Rodbertus, and Marx, etc., defended it.In their view, labor always creates a "surplus," that is, a surplus other than wages and the depletion of capital used to assist labor; the persecution of the worker is that this surplus is exploited by others.But the assumption that the whole surplus is the product of labour, already presupposes what they finally tried to prove, which they did not prove; and it is also false.It is not true that the yarn in the spinning mill, after the wear and tear of the machinery, is the product of the labor of the worker; yarn is the product of the labor of the worker and of the employer and of the managers in charge, and of the labor which employs capital, which in turn derives from labor and wait.Yarn is thus the product of various labors and waiting.If we regard it only as a product of labour, and not as a product of labor and waiting, ruthless logic will undoubtedly force us to admit that there is no reason for interest (that is, the reward for waiting); for the conclusion is already contained in the premises.Rodbertus and Marx dared to admit that their premise came from Ricardo, but it actually violated the essence of Ricardo's value theory, just as it violated common sense. In other words, the postponement, if satisfied, generally entails sacrifices on the part of the postponer, just as additional work entails sacrifices on the part of the labourer; if such a delay does make it possible to use a method of production which was initially costly, but by which Just as it is true that total happiness can be increased by increasing labor, it cannot be believed that the value of a thing is determined purely by the labor expended on it.Attempts to establish this premise implicitly assume that the service rendered by capital is a "free" good that is rendered without sacrifice, and thus does not require interest as a reward to induce its existence.This is the conclusion that the above premises need to prove.Rodbertus and Marx will always command our admiration for their profound sympathy for the suffering, but what they considered to be the scientific basis for their practical proposals were really nothing more than a series of circular arguments, to the effect that interest There is no economic reason for existence, but this conclusion is already implicit in their premises; although on Marx's side it is clothed in Hegel's mysterious phrases, as in his preface to the first volume of Capital. He uses these phrases to "be coquettish," as we are told. Section 4. The total interest paid by the borrower, including both pure interest and risk (actual and personal) insurance premiums and management remuneration.It does not, therefore, have an equal tendency like pure interest. Now we proceed to our analysis.When we say that interest is only the return of capital, or only the return of waiting, what we mean is pure interest, and the term interest referred to by ordinary people includes other factors besides pure interest. This kind of interest is called gross interest. These additional factors become all the more important in the lower the embryonic stages of commercial mortgage and credit organization.For example, in the Middle Ages, when a prince decided to expropriate part of his future income, he might have borrowed a thousand taels of silver and promised to repay 1,500 taels at the end of the year, but there was no full guarantee of whether he would fulfill his promise; Maybe I would rather have absolute certainty and charge 1,300 taels at the end of the year than make empty promises.In this case, the nominal interest rate on the loan is 50%, but the real interest rate is 30%. The necessity of deducting the risk premium is so obvious that it is often not overlooked.But what is less obvious is that all kinds of lending will always be troublesome to the lender; at the same time, judging from the nature of the lending, if the risk it takes is very high, it will often take a lot of hard work to minimize this risk, so , a large part of which appears to the borrower to be interest, and from the point of view of the lender to be nothing more than a payment for managing a nuisance. At present, the net interest rate in the UK is about a little less than 3% per annum.Because investing in first-class securities brings a steady income to the investor without bother and other expenses, it cannot exceed three per cent.When we see able merchants borrowing money at four per cent on perfectly sound collateral, we may regard four per cent as gross interest, of which there is a little less than three per cent in net interest, and the management remuneration of the lender a little more than one per cent. percent. In addition, the pawn business is almost risk-free.However, the interest rate on lending by pawnbrokers is generally 2.5% per annum, or more.A big part of that is the compensation for managing this tricky business.Or, to take an extreme example, some people in London and Paris (and perhaps elsewhere) make their living exclusively by lending money to small greengrocers. The interest rate is one cent to recover the loan.The risk of this kind of business is very small, and the chances of losing money are not many.Lend a farthing at the rate of one cent a day, and you will get a billion pounds at the end of the year.But one cannot become very rich by lending money to small greengrocers alone; for no one can lend large sums in this way.The so-called interest on such lending is in fact almost entirely payment for a certain kind of work, which the capitalist is rarely willing to perform. The fifth section continues. If the capital used by an enterprise is mostly loan capital, additional risks often occur, and a more careful analysis of such risks is necessary.There are two people, A and B, who both operate the same enterprise. The capital used by A is its own capital, while the capital used by B is mainly loan capital. There is a class of risks that are common to both.This type of risk is called the business risk of the particular business in which they are engaged; business risk arises from many causes, among them changes in the market for raw materials and finished products, sudden changes in style, new inventions, the emergence of powerful new competitors nearby, etc. .Besides, there is another class of risk, which is paid by none other than the borrower of the capital.We may call this type of risk personal risk.For the one who lends capital for the use of his business must charge a high rate of interest to guard against accidents, which may arise from defects in character or incapacity of the borrower. The ability, energy and honesty of the borrower may sometimes appear to be great, but it is not.Unlike those who use their own capital, he can face up to failure and stop immediately when the speculative business is slightly unfavorable.Conversely, if his character is low, he may be less sensitive to his loss.Because if he stops immediately, he is bound to lose everything.If he continues to speculate, any additional loss will fall to his creditors, and any profit will be his own.Many creditors suffer losses from this semi-deceitful indolence of the debtor, and a few from deliberate deceit.For example, the debtor may use various cunning devices to conceal those estates which actually belong to his creditors, so that, after the declaration of bankruptcy, he may start another enterprise; and gradually use his hidden funds without arousing too much suspicion. Thus the price paid by the borrower for the employment of the capital appears to him as interest, but to the lender as profit, since it includes a risk insurance, often very large, and the management remuneration for the work, The job is about minimizing risk, and is often very laborious in itself.Changes in the nature of such risks and management work naturally entail corresponding changes in what is called gross interest (the interest paid on the use of money).The tendency of competition, therefore, is not to equalize gross interest; Conversely, the more informed lenders and borrowers are about their borrowings, the more likely it is that some will receive loans at lower interest rates than others. With regard to the perfectly organized money market, in which capital moves from a surplus to a deficit, or from one branch of business which is shrinking to another which is expanding, we must confine ourselves to a later stage. Come study.We are now content to acquiesce that a slight difference in the net rate of interest on capital lent to two investments in the same Western country will cause capital to flow, perhaps through indirect channels, from one investment to the other. Indeed, if both investments are small and not many people are well acquainted with them, the movement of capital may be slow.For example, one person may pay five per cent on a small mortgage, while another pays only four per cent on the same mortgage.In bulk lending, however, the net rate of interest (as far as interest separated from other elements of profit) is about the same throughout England.In addition, the difference in the average net interest rate of Western countries is rapidly reduced due to the development of transportation, especially because the large capitalists in each country own a large number of securities, and the sales prices of securities that provide the same income on the same day are actually the same all over the world. When we discuss the money market, we must examine why at times the supply of available capital greatly exceeds at other times, and why bankers and other credit institutions are sometimes content with extremely low interest rates, if the securities are risk-free, and You can withdraw your loan at any time.At this time they prefer to make short-term loans and charge modest interest rates, even if the borrower's securities are not first-class.Because if they find that the borrower has shortcomings, they can not continue to borrow, and the risk of loss can be greatly reduced.Because short-term loans on risk-free securities charge only a nominal price, almost all of the interest they earn from borrowers is risk insurance and handling charges.But on the other hand, this kind of loan is actually not very cost-effective for the borrower: it exposes the borrower to risks, and in order to avoid this risk, he is often willing to pay a much higher interest rate.For if some misfortune destroys his credit, or if a disturbance in the money-market temporarily leaves loanable capital short, he is at once in trouble.Therefore, lending at nominally low rates of interest, even for short periods, cannot in practice be an exception to the above general rule. Section 6 The term interest rate must be used with caution when it is applied to old investments. The funds from the general source flow into investment in production in two ways: the smaller share is new investment in old capital goods; Either due to immediate consumption, as food, fuel, etc., or to wear and tear, as railroad tracks, or to time factors, as thatched roofs and obsolescence of commercial samples; or to a combination of the above.The annual flow of the second stock, even in a country like England, where capital is usually in a permanent form, would not be less than a quarter of the total capital.It is therefore justifiable to suppose that the owners of capital in general are able to adapt the form of capital generally to the prevailing normal conditions, in order to obtain the same net income from this or that investment. Only on the basis of the foregoing assumptions are we entitled to say that capital in general is accumulated under the expectation of equal net interest for all forms of capital.We cannot fail to repeat that the term "interest rate" has very limited meaning when applied to old capital investment products.We may say, for example, that the capital invested in the trade and industry of this country amounts to about £7,000,000, with a net profit of three per cent a year.However, although this statement is convenient and permissible in many cases, it is not correct.We should say that if the net interest rate of the new investment capital in each industry and commerce is about 3% per annum, then the income from the old investment in each industry and commerce, if multiplied by 33 times (that is, using the 3% interest rate), can be restored by income As capital, it is approximately equal to seven billion pounds.Because once the capital has been invested in improving the land, building houses, railways and machinery, the value of the capital is the sum of its expected future net income (or quasi-rent) discounted into the present value; if the ability of the capital to generate income in the future decreases, then its value is correspondingly reduced, and its new value can be obtained by subtracting depreciation from the smaller income and adding capital reduction Section VII deals with the relationship between changes in the purchasing power of money and changes in the rate of interest. Unless expressly stated to the contrary, it is always assumed in this book that all values ​​are in terms of money of constant purchasing power, and that, as the astronomers have told us, it is not the actual sun that determines the beginning or end of the day, And taking the assumed median sun as the standard, the movement of this median sun in the universe is always the same.Moreover, the effect of changes in the purchasing power of money on the terms of lending, which is prominent in the short-term lending market, differs from other markets in many details, and their effects cannot at this moment be fully discussed. But these influences, however viewed from the point of view of abstract theory, should be mentioned here in passing.For the rate of interest a borrower is willing to pay is the measure of his expected return on capital employed, which can only be measured on the assumption that the purchasing power of money is constant when borrowing and repaying. For example, suppose a person borrows £100 and agrees to repay £105 at the end of the year. In the meantime, if the purchasing power of money increases by 10% (or the price of goods falls by 10%), he will never be able to recover the £105 he is due unless he sells one-tenth more commodities than at the beginning of the year; If there has been no change in value compared with the general commodity, he must sell the commodity which at the beginning of the year cost him one hundred and fifteen shillings to repay the principal and interest of one hundred pounds; 15.5%, he is at a disadvantage.He pays five per cent in nominal interest for the use of money, but in reality he pays one cent and five per cent. On the other hand, if prices had risen during the year to reduce the purchasing power of money by 10 per cent, he could sell £100 of commodities which cost him £90 at the beginning of the year; And get 5.5% of the income. When we discuss the causes which determine the alternations of booms and busts in commercial activity, we see that they are closely connected with changes in the real rate of interest which are caused by changes in the purchasing power of money.Because when prices tend to rise, people scramble to borrow money and buy supplies, which fuels the flames and makes prices skyrocket; Now that the enterprise has expanded, the operation and management will inevitably be neglected and wasteful; the actual value repaid by those who use the loan capital is less than the value borrowed, thus sacrificing the interests of the society to enrich themselves.In the future, when credit falters and prices start to fall, everyone wants to get rid of commodities and preserve the currency with increasing value, so that the prices will fall faster, and the further decline in prices will shrink credit more. Therefore, in the long run, prices will The fall is the result of previous price falls. We shall see that changes in prices depend only in a small degree on changes in the supply of precious metals.Even if the gold and silver double standard is used instead of the gold standard, the price changes will not be greatly reduced.But the evils caused by changes in prices are so great that it is worth paying a great price for the reduction of some of them.This evil, however, is not necessarily inherent in the slow change in the purchasing power of money, which changes as man's control over nature changes.At the same time, there are gains and losses in this change.During the first fifty years of the First World War, improvements in production technology and the expansion of abundant sources of raw materials doubled the efficiency of human labor in obtaining many of the things it needed. If the purchasing power of the pound sterling, calculated in terms of the quantity of commodities, is constant, instead of changing, as it has always been, as man's control over nature increases, that is, those workers whose wages in money are largely determined by custom (though now dwindling in number) is harmful.But this is fully discussed elsewhere.